GAAP ALERT No.14/2008 To read online please click here
15 August 2008
By Colin Parker B.Bus FCA MAICD
Principal, GAAP Consulting, colin@gaap.com.au
Member of the Australian Accounting Standards Board
AASB/NZ FASB July Meeting Highlights
AASB Report on NFP Entities
ASIC Outlines Market Turmoil Response to Financial Services Industry
Simplified and Converged EPS Proposals of IASB
2nd Annual Improvements ED Released by IASB
IASB July Meeting Highlights
Financial Instruments Expert Advisory Panel July Meeting Highlights
Trustee of SMSF in Court on ASIC Charge
APESB August Agenda
ICAA Presentation Feedback
AASB/NZ FASB July Meeting Highlights
Highlights of 30-31 July joint meeting of the AASB and the NZ Financial Reporting Standards Board (FRSB) included:
Generic AASB/NZ Topics
Emission Trading Schemes (ETS): Noted that the ideal situation would be for the IASB to have progressed its project on ETS so that no separate action was required by either the AASB or NZ FRSB. Directed staff to develop a paper that outlines possible processes that the Boards could follow should the IASB project not progress in a timely manner
Criteria for Modifying IFRS for Not-for-profit Entities: Considered a draft policy paper and agreed on a high-level principle that focuses on there being not-for-profit entity differences to justify a modification. Also agreed a range of factors that should be considered on a case-by-case basis. A further draft policy paper will be considered in September
Conceptual Framework: Considered IASB ED ‘The Objective of Financial Reporting and the Qualitative Characteristics and Constraints of Decision-useful Financial Reporting Information’, and the IASB Discussion Paper ‘The Reporting Entity’; how the IPSASB’s draft proposals on those topics compare with the IASB’s proposals; and the potential implications of applying the proposals in the IASB’s ED and the preliminary views in the IASB’s Discussion Paper to not-for-profit entities/public benefit entities, and
Long-term Fiscal Sustainability: Noted the IPSASB’s project, and will monitor the project as it progresses. An IPSASB Consultation Paper is planned for the first half of 2009.
AASB Australian Context
Revenue from Non-Exchange Transactions: In relation to the AASB/NZ FRSB joint short-term project to develop a common Accounting Standard (which would replace AASB 1004 ‘Contributions’) based on IPSAS 23, considered the potential implications of IASB-FASB project on revenue recognition for the treatment of revenue from exchange transactions as compared with the treatment of revenue from non-exchange transactions in IPSAS 23. Reaffirmed the decision to develop an ED on revenue from non-exchange transactions that is based closely on IPSAS 23 ‘Revenue from Non-Exchange Transactions (Taxes and Transfers’). There was general support for IPSAS 23 on ‘advance receipts’ issue, and the project team is to develop draft guidance to clarify when a transfer arrangement becomes binding. This would extend the circumstances under which liabilities would be recognised for non-exchange transactions in comparison with AASB 1004
Business Combinations for NFP Entities: Decided that there is no conceptual basis for accounting for restructures of local governments differently from other, analogous, types of business combinations under AASB 3. Noted that the accounting for business combinations may differ depending on whether entities, such as local governments, are commonly controlled entities; this issue is to be addressed in the ‘control in the public sector’ project. In the interim, decided to maintain the status quo in the accounting for restructures of local governments by incorporating the requirements originally transferred from AAS 27 ‘Financial Reporting by Local Governments’ to AASB 3. Furthermore, no exemption will be made to the requirements of AASB 3 for accounting for any other types of combinations among NFP/PBE entities in either the private or public sectors in the absence of a conceptual basis to justify a departure from those requirements.
Service Concession Arrangements – Grantor Accounting: Considered the submissions received on Invitation to Comment ITC 16 ‘Request for Comment on IPSASB Consultation Paper Accounting and Financial Reporting for Service Concession Arrangements’ (April 2008), and discussed a draft submission to the IPSASB, and
Related Party Disclosures by Not-for-profit Public Sector Entities: Considered and agreed a project plan with further research required on existing requirements and practices in Australian jurisdictions and in other countries. The requirements of AASB 124 ‘Related Party Disclosures’ and IPSAS 20 ‘Related Party Disclosures’ are to be the key reference points for the project.
AASB Report on NFP Entities
The AASB and other national standard-setters have released a report ‘Application to Not-for-profit Entities in the Private and Public Sectors’ that assesses the implications of two significant and far reaching IASB/FASB conceptual framework projects in the not-for-profit context. The two projects are: the Exposure Draft ‘An Improved Conceptual Framework for Financial Reporting: Chapter 1: The Objective of Financial Reporting, and Chapter 2: Qualitative Characteristics and Constraints of Decision-useful Information Financial Reporting Information’, and the Discussion Paper ‘Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Reporting Entity’.
The IASB and FASB are developing a common conceptual framework that will drive the future direction of financial reporting, including the development and interpretation of accounting standards. This project in its initial stages focuses on exclusively on concepts for the private sector business undertakings. The Report by national standards-setters identifies not-for-profit issues that such constituents should be mindful as the project develops. It also identifies issues that the IASB/FASB would consider when it specifically reviews the conceptual framework for not-profit issues. NFP entities should be aware of these issues, and provide input into the national standard-setters monitoring project. This will help ensure that that not-for-profit issues are adequately dealt with as the project unfolds.
This Report may also help with preparing comments to the AASB and/or the IASB on ED 164 ‘An Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-useful Financial Reporting Information’ and ITC 17 ‘Request for Comment on IASB Discussion Paper Preliminary Views on an improved Conceptual Framework for Financial Reporting: The Reporting Entity. Comments on these are sought by 25 August.
ASIC Outlines Market Turmoil Response to Financial Services Industry
ASIC outlined five key market issues it will be focusing on over the coming months, specifically responding to concerns emerging from current market conditions. The key areas are:
Managed Investment Schemes (MIS) and Disclosure of Risk: Where a MIS is in financial difficulties, management must focus on liquidity, redemption practices and valuations
Credit Ratings Agencies: ASIC is working with Treasury on a review of how credit rating agencies operate. The review is considering the extent to which investors rely on the ratings agencies, and whether the level of diligence and discussion undertaken by agencies warrants this reliance. The review will also consider how the agencies deal with conflicts of interest
Listed Investment Vehicles: ASIC will also focus on major transactions (e.g., privatisation, substantial buy-backs, buy-outs of activist shareholders, asset sales and wind-ups) involving listed investment vehicles that are trading at a significant discount to their announced asset values. These transactions aim to increase share price or provide an alternative exit mechanism for holders. ASIC is to look closely to see how conflicts of interest are handled (providing arms’ length valuations and independent expert reports as to value are important), adequacy and timeliness of disclosure (directors should be frank about alternatives to the proposed transaction, and the possible benefits of the transaction to the person proposing it). ASIC will also be alert for substantial shareholders collaborating to force a restructure in breach of the takeover provisions
Audit and Accounting Issues concerning Present Valuation Methodologies and Disclosure for Complicated Financial Assets: ASIC’s accounting team will be focusing on several key areas including: valuation accounting, treatment of off-balance sheet entities, and correct classification of debt as current or long-term, and
Market Surveillance for Illegal Trading Activities: A new project to review listed entities’ analysts’ briefings that accompany results announcements. ASIC will be looking to see that these briefings are available to all investors. ASIC expects forward looking statements to be clear about assumptions and risks.
Simplified and Converged EPS Proposals of IASB
The IASB released proposals to simplify the calculation of earnings per share (EPS), and to eliminate differences between the methods required by IFRSs and US accounting standards to calculate EPS. The proposals are part of the short-term convergence project that the IASB is conducting jointly with the FASB. Consequently, the FASB has also released an ED to amend SFAS 128 ‘Earnings per Share’. Comments on the ED ‘Simplifying Earnings per Share (proposed amendments to IAS 33)’ are sought by 5 December 2008.
The proposals aim to achieve convergence by:
Providing a clear principle to determine which instruments should be included in the EPS calculation – the weighted average number of ordinary shares includes only those instruments that give their holder the right to share currently in profit or loss of the period Clarifying the EPS calculation for particular instruments, such as contracts to sell or repurchase an entity’s own shares and participating instruments: The ED treats those contracts as if the entity had already repurchased the shares, and the entity would exclude those shares from the denominator of the EPS calculation. Amend the calculation of diluted EPS for participating instruments and two-class ordinary shares. If a convertible financial instrument would have a more dilutive effect if conversion is assumed, then the entity would assume the more dilutive treatment for diluted EPS, and Simplifying the EPS calculation for instruments that are accounted for at fair value through profit or loss: For such instruments (including the derivative component of a compound financial instrument), an entity would not adjust the numerator or denominator of the diluted EPS calculation.
2nd Annual Improvements ED Released by IASB
The IASB released an exposure draft of proposed amendments to eight IFRSs under its annual improvements project (necessary, but non-urgent, amendments to IFRSs that will not be included in another project). The proposals range from guidance added to the Appendix of IAS 18 ‘Revenue’, on how to determine whether an entity is acting as a principal or as an agent, to changes of wording to clarify the meaning and remove unintended inconsistencies between IFRSs.
The standards affected and the nature of the proposed amendments are:
IFRS 2 ‘Share-based Payment’: Scope of IFRS 2 and revised IFRS 3 IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’: Disclosures of non-current assets (or disposal groups) classified as held for sale or discontinued operations IFRS 8 ‘Operating Segments’: Disclosure of information about segment assets IAS 7 ‘Statement of Cash Flows’: Classification of expenditures on unrecognised assets IAS 18 ‘Revenue’: Determining whether an entity is acting as a principal or as an agent IAS 36 ‘Impairment of Assets: Unit of accounting for goodwill impairment test IAS 38 Intangible Assets’: Additional consequential amendments arising from revised IFRS 3; measuring the fair value of an intangible asset acquired in a business combination; and IAS 39 ‘Financial Instruments: Recognition and Measurement’: Scope exemption for business combination contracts, application of the fair value option, cash flow hedge accounting; and bifurcation of an embedded foreign currency derivative.
Unless otherwise specified, the proposed effective date for the amendments is for annual periods beginning on or after 1 January 2010, although entities are permitted to adopt them earlier. The proposed effective date for those amendments arising from the revised IFRS 3 ‘Business Combinations’ is 1 July 2009 (in line with the effective date for the revised standards on business combination; IFRS 3 and IAS 27 ‘Consolidated and Separate Financial Statements’). The IASB requests comments by 7 November 2008.
IASB July Meeting Highlights
Highlights of 21 – 25 July meeting of the IASB included:
Valuing Financial Instruments in Markets that are No Longer Active: The meetings of expert advisory had shown that the fair value measurement requirements and guidance in IAS 39 are generally clear, and there is consistency in the approach to determine at a fair value measure, but there is a need for further educational effort for smaller financial institutions and corporates. At the 31 July meeting of the expert advisory panel, it will discuss a draft document that contains: a summary of the issues encountered in the credit crisis; IAS 39’s requirements and guidance for those issues; and a summary of how the panelists dealt with the issues in practice. In due course, a draft will be posted on the IASB Website for interested parties to provide feedback. After addressing measurement, the panel will address disclosures
Amendments to IFRS 5 ‘Non-current Assets Held for Sale and Discontinued Operations’: Decided that the definition of discontinued operations should include businesses (as defined in IFRS 3 ‘Business Combinations’) that meet the criteria to be classified as held for sale on acquisition; various disclosure exemptions should be provided for businesses that meet the criteria to be classified as held for sale on acquisition; and that an entity should provide certain reconciliations
IFRS for Private Entities (formerly SMEs): Following decisions were made on the proposed Standard:
Associates – The cost model would now not be permitted for an investment in an associate that has a published price quotation Jointly Controlled Entities (JCEs) – If an IFRS developed from ED 9 ‘Joint Arrangements’ is finalised before this proposed Standard is issued, the new requirements for joint ventures should be considered for inclusion. If ED 9 is not finalised, the cost model, fair value through profit or loss model, equity method and proportionate consolidation as accounting policy options for investments in JCEs, as proposed in the ED, will be retained with one exception. The cost model would not be permitted for an investment in a JCE that has a published price quotation Property Plant and Equipment – The cost of an item of PPE should be allocated to its significant parts, with each part depreciated separately (component depreciation) only when the parts have significantly different patterns of benefit consumption. Clarified that residual value, useful life and depreciation method for an asset should be reassessed only if there is an indication of change since the last reporting date Leases – Criteria similar to those used in IAS 17 ‘Leases’ should be retained to classify leases as either operating or financing according to their substance. Additional guidance will be added to assist in applying the criterion ‘major part of the economic life of the asset’ Government Grants – The option in the ED to apply IAS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’ for those government grants not related to assets measured at fair value through profit or loss will be removed Impairment of Non-Financial Assets – An impairment test will be performed only if there is an indication that an asset may be impaired. The approach for determining the impairment loss once an impairment is indicated should be similar to IAS 36 ‘Impairment of Assets’, and the Standard will include the concepts of ‘recoverable amount’, ‘value in use’ and ‘cash-generating units’. Where it is not possible to determine fair value less costs to sell for an asset as there is no basis for making a reliable estimate of that amount, the asset’s value in use may be used as its recoverable amount.
Income Taxes: Reviewed a pre-ballot draft of the exposure draft of amendments to IAS 12 ‘Income Taxes’
Consolidation: Discussed a draft exposure draft to replace IAS 27 ‘Consolidated and Separate Financial Statements’ and SIC-12 ‘Consolidation – Special Purpose Entities. The staff draft will be available on the IASB’s Consolidation Project Web page and form the basis of discussions at public round-tables to be held in September. An exposure draft will be published towards the end of the year
Leases: Publication of a new lease accounting standard is expected by mid-2011 adopting the approach that would apply the present finance lease model, adapted when necessary, to all leases (decided to defer the development of a new accounting model for lessors)
Other key decision included:
For lease contracts that give the lessee an option to extend the lease for an additional period or an option to terminate the lease early, decided that the lessee should not recognise these options as separate assets. The assets and liabilities recognised by the lessee should be based upon the lease term. A preference was expressed for using a probability weighted best estimate of the lease term Discussed some of the factors that affect whether a lessee will exercise an option to extend or terminate the lease, and decided that contractual, non-contractual and business factors should be considered when determining the lease term Contingent lease payments should be determined using a probability-weighted best estimate of the rentals payable that a lessee should initially measure both its right-of-use asset and its lease obligation initially at the present value of the lease payments A lessee should discount the lease payments using the lessee’s incremental borrowing rate for secured borrowings On subsequent measurement, a lessee should amortise the right-of-use asset over the shorter of the lease term and the economic life of the leased asset based upon the pattern of consumption of economic benefits embodied in the right-of- use asset. The lessee should apportion the lease payment between interest and the reduction of the outstanding liability Remove the existing requirement to classify a lease as a finance lease (in-substance purchase) or an operating lease; the same approach would apply for all leases
Revenue Recognition: Confirmed that a discussion paper should be published later this year with a six-month comment period with intention to make significant improvements to the existing revenue recognition standards by June 2011
Management Commentary: Decided that work on the management commentary project will be based on the ‘in process’ work for phase A of the Framework project, and the management commentary is subordinate to the Framework. Also decided to require the following specific content elements that were not described in the discussion paper ‘Management Commentary’ (2005): the strategy used for evaluating management (including executive remuneration); the strategy used for minimising taxes and how that strategy integrates with the entity’s uncertain tax position; a discussion of key resources, including unrecognised intangible assets; and a discussion of financing obligations. Presentation requirements for management commentary will be developed that link to IFRS 8 ‘Segment Reporting’. An exposure draft of a proposed guidance statement is scheduled for publication in the fourth quarter of 2008
Fair Value Measurement: Assessed the first phase of the standard-by-standard review of fair value measurements currently required or permitted in IFRSs to assess whether the IASB/IASC intended each fair value measurement basis to be a current exit price. The review showed that entry and exit prices are equal when they relate to the same asset or liability on the same date in the same form in the same market. Decided to define fair value as a current exit price, and will discuss which market to consider for this purpose. The wording of the definition of fair value will reflect that an exit price considers a market participant’s ability to generate economic benefit by using an asset or by selling it to a third party. The second phase of the review will be a scope assessment for existing uses of fair value in IFRSs
Financial Instruments with Characteristics of Equity: The IASB was updated on discussion paper ‘Distinguishing between Liabilities and Equity’ (January 2008) by representatives from the Proactive Accounting Activities in Europe (PAAinE) initiative of the European Financial Reporting Advisory Group (EFRAG) and the German Accounting Standards Board. The IASB published a discussion paper (February 2008) that contained an IASB Invitation to Comment and the FASB document ‘Financial Instruments with Characteristics of Equity’, and
Agenda proposals: Financial instruments with characteristics of equity, and derecognition of financial instruments were added to the active agenda. These projects were previously on the IASB’s research agenda.
Financial Instruments Expert Advisory Panel July Meeting Highlights
On 31 July 2008 the panel met to discuss a draft document that contains: a summary of the issues encountered in the credit crisis; IAS 39’s requirements and guidance on those issues; and a summary of how the panelists have dealt with the issues in practice, which focuses on the processes and approaches used when measuring the fair value of financial instruments when there is no longer an active market. The comments obtained will be incorporated into the document and published shortly for interested parties to provide feedback.
Trustee of SMSF in Court on ASIC Charge
Mr. Atan Kassongo appeared in the NSW Downing Centre Local Court in relation to a criminal charge brought by ASIC under the Superannuation Industry (Supervision) Act 1993 (the SIS Act). Mr. Kassongo is charged with dishonestly failing to ensure a self-managed superannuation fund (SMSF), the Kassongo Superannuation Fund (KSF), was maintained in accordance with the sole purpose test while trustee of the fund. This criminal charge follows an investigation conducted with the assistance of the Australian Taxation Office and is the first to be laid against a trustee of a SMSF under the SIS Act.
ASIC alleges that the preserved superannuation benefits of 192 superannuants totalling $4,055,043 were deposited into the bank accounts of the KSF. These funds were rolled over from 56 complying superannuation funds. Mr. Kassongo then allegedly used the KSF to obtain early access to these benefits by withdrawing and distributing the funds to the superannuants and agents engaged by him to assist in the early release scheme. Mr. Kassongo retained over $600,000 for himself by way of a commission.
ASIC also alleges that, at the time the KSF received the superannuation benefits from the complying superannuation funds, Mr. Kassongo was aware that he had an obligation to preserve these benefits until the superannuants had satisfied a condition of release, but had no intention of doing so. The matter returns to the Downing Centre Local Court on 19 August 2008.
APESB August Agenda
The agenda for 11-12 August meeting of the Accounting Professional & Ethical Standards Board includes:
Standards Development and Review: ED 02/08 APES 345 ‘Reporting on Prospective Financial Information’, Risk Management, Financial Advisory Services Discussion Paper, Outsourcing Discussion Paper, APES 320 Quality Control for Firms Project Proposal, ED 03/08 APES 210 ‘Conformity with Auditing and Assurance Standards’, and ED 0X/08 ‘Proposed Standard APES 335 Insolvency Services’, and Strategic Plan.
ICAA Presentation Feedback
Colin Parker, our team leader, presented a financial reporting update at Small Business Industry Day for The Institute of Chartered Accountants in Australia. The feedback comments included:
Well presented Easy approach Good presentation for a very dry topic Extremely well presented with useful guidance & examples Knowledge of the subject matter Excellent presentation skills, and Absolutely fantastic.
Colin and our team members, Justin Reid (Audit), David Sauer (Financial Reporting), Jim Dixon (Public Sector Financial Reporting), Stephen LaGreca (Financial Reporting) and Greg Pound (Audit) are available to conduct in house training and briefings to meet your needs.
Outstanding Exposure Drafts
Accounting
22 August Discussion Paper ‘Reducing Complexity in Reporting Financial Instruments’ – AASB 25 August ED 164 ‘An Improved Conceptual Framework for Financial Reporting: The Objective of Financial Reporting and Qualitative Characteristics and Constraints of Decision-useful Financial Reporting Information’ – AASB 25 August ITC 17 ‘Request for Comment on IASB Discussion Paper Preliminary Views on an improved Conceptual Framework for Financial Reporting: The Reporting Entity’ – AASB 5 September Discussion Paper ‘Financial Instruments with Characteristics of Equity’ – IASB 19 September Discussion Paper ‘Reducing Complexity in Reporting Financial Instruments’ – IASB 19 September Discussion paper ‘Preliminary Views on Amendments to IAS 19 Employee Benefits’ – IASB 20 September 2008 ‘Review of the Constitution: Public Accountability and the Composition of the IASB – Proposals for Change’ – IASB 29 September ‘An Improved Conceptual Framework for Financial Reporting: Chapter 1: The Objective of Financial Reporting and Chapter 2: Qualitative Characteristics and Constraints of Decision-useful Financial Reporting Information)’ – IASB and FASB 29 September ‘Preliminary Views on an Improved Conceptual Framework for Financial Reporting: The Reporting Entity’ – IASB and FASB 7 November ‘Improvements to IFRS (Proposed amendments to International Financial Reporting Standards’ – IASB 5 December ‘Simplifying Earnings per Share (proposed amendments to IAS 33)’ – IASB
Auditing
31 August ED 5/08 ASA 240 ‘The Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report’ 31 August ED 6/08 ASA 260 ‘Communication with Those Charged with Governance’ 31 August ED 7/08 ASA 315 ‘Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment’ 31 August ED 8/08 ASA 330 ‘The Auditor’s Procedures in Response to Assessed Risk’
Ethics
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